A second mortgage can make sense under some circumstances. If you are certain that you’ll be able to pay off the loan in a short period of time, the higher interest rate is offset by the shorter loan term. Another example might be where your primary or first mortgage has a very low interest rate. It might makes sense to take out a higher, second mortgage, on a small amount rather than refinance the total of two amounts.
Over time, interest rates change and any time they change in your favor it pays to take another look at your loans. Generally if you can find a loan that is a whole percentage point lower than your current mortgage its time to look at the process.
When you begin to compare loans, make sure that you find out all the costs. Sometimes agents will not give you the entire picture and it pays to know what to ask about. If the interest rate is very low, find out if there are points or origination fees. A point is equal to one percent of the loan amount. You can usually get lower interest rates by paying extra points. But it doesn’t always make sense. Sometimes you can save more money with the higher rate and fewer points.
There are a number of mortgage calculators available on the web. It only takes a few minutes to plug in the numbers and you’ll be able to see the costs of various options.
Refinancing a second mortgage can be expensive. A slightly lower rate might not be worth the savings once closing costs and other fees are added into the equation. Unscrupulous loan companies will get you in the door by showing extremely low interest rates. The devil is in the details. Ask about the total cost.
Variable rates or balloon mortgages can save you a lot of money but only in the short term. These types of loans often have low introductory rates. If you sell your home when the introductory rates expire, you gain a lot but if you plan on holding on after that you could lose all your gains. Don’t sign on any loan until you understand all the terms in the contract. A little bit of extra effort can make the difference between a loan you can live with and financial disaster.
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